Do CEOs exercise managerial discretion to save their jobs?

Chief Executive Officers (CEOs) wield considerable power and authority. In many industries and contexts, CEO turnover is studied in terms of antecedents, the event itself, and the related consequences. However, the extent to which CEOs exert their power and attempt to prevent their dismissal has not been thoroughly examined. In this study, we examine the role of CEOs exercising managerial discretion in their effort to prevent their own corporate demise. We hypothesize that CEOs cut discretionary expenses such as research and development, advertising, and rent in order to boost earnings and enhance financial performance. A sample of CEO turnover from Standard and Poor’s ExecComp database for the period 1992–1998 in US firms yielded 474 turnover firms and 2,066 control firm-years. We tested the effects of CEO turnover and managerial discretion on firm performance measured by cumulative abnormal stock returns. We also compared the turnover and non-turnover firms in terms of pattern of discretionary spending prior to CEO turnover. The results are consistent with our prediction that CEOs facing termination attempt to post higher earnings by reducing discretionary spending after controlling for firm performance, firm diversification, book to market ratio, and CEO ownership, industry-, and year dummies.